Demerger Announcement
Smith WH PLC
27 June 2006
27 June 2006
WH Smith PLC
Separation of WH Smith Retail and News Distribution businesses via a Demerger
On 12 April 2006 the Board of WH Smith PLC announced its intention to separate
the WH Smith Retail and News Distribution businesses via a Demerger, resulting
in the creation of two separately listed companies. Today, the Board is
providing investors with further information on the proposed Demerger and
outlining the reasons why the Board believes that the Demerger is in the best
interests of WH Smith PLC and its Shareholders.
Key Highlights
• Demerger of WH Smith Retail business into a separately listed company,
New WH Smith PLC, which will be renamed WH Smith PLC
• News Distribution business will be renamed Smiths News PLC
• Existing WH Smith Shareholders will receive one share in New WH Smith
and one share in Smiths News for each WH Smith share
• Kate Swann and Alan Stewart to be Group Chief Executive and Group
Finance Director, respectively, of New WH Smith. All other members of the
existing WH Smith Board become non-executive directors of New WH Smith
• Mark Cashmore and Alan Humphrey to be appointed Chief Executive and
Finance Director, respectively, of Smiths News
• Brendan Fitzmaurice to be appointed non-executive Chairman, Dennis
Millard to be appointed non-executive Deputy Chairman and Anthony Cann to be
appointed non-executive director of Smiths News. WH Smith is seeking, as
soon as is practicable, a further non-executive director to join the board
of Smiths News
• New WH Smith and Smiths News intend to recommend dividends at the time
of their preliminary results announcements for the period ended 31 August
2006 of 6.2p and 4.0p, respectively
• There will be no change to employees' pension benefits as a result of
the proposed Demerger. Upon Demerger, the WH Smith Pension Trust will be
divided into two sections with each successor entity bearing its own share
of the existing WH Smith Group pension obligation
• As part of the ongoing programme for reducing the pension deficit, WH
Smith has agreed with the Trustees of the WH Smith Pension Trust that a £50m
payment be made into the WH Smith Pension Trust to be funded from £70m of
new borrowings of Smiths News
• The Management Investment Plan will continue for existing participants
and Executive Directors of WH Smith (Kate Swann and Alan Stewart) are
required to retain Investment Shares in both New WH Smith and Smiths News.
Separate EPS targets will be set for each business based on the original
plan. The TSR of the combined companies will be added together so that the
aggregate is comparable with the original targets
• The proposed Demerger is subject to Shareholder approval. Shareholder
documentation is expected to be posted to Shareholders on or around 7 July
2006 with Shareholder meetings anticipated in early August and the Demerger
expected to become effective on 31 August 2006
Commenting on the announcement, Kate Swann, Chief Executive of WH Smith, said:
'With a strong team in place to run Smiths News and the existing management team
remaining to run Retail as an independent company, both businesses will benefit
from increased focus on their respective strategies.'
Mark Cashmore, Chief Executive of Smiths News, said:
'The Demerger is an exciting step for Smiths News. The team is looking forward
to working as an independent company focused on building value for shareholders
by providing value-added customer service to both publishers and retailers.'
Current Trading
Since the announcement of its Interim Results on 12 April 2006, WH Smith Group's
businesses have continued to trade satisfactorily and market conditions have not
changed. High Street Retail has made further progress in its recovery plan with
the focus on increasing profitability and improving cost control. Travel Retail
has continued to build on its good first half trading results. In a challenging
market, News Distribution has delivered a solid performance. Overall the Board
continues to be cautious about the outlook for consumer spending. Nevertheless,
current trading is in line with management expectations and the Board remains
confident in the outcome for the full year.
Background To And Benefits Of The Demerger
Since 2003 WH Smith has undertaken a restructuring of the WH Smith Group by
selling non-core assets including its Asia Pacific retail operations, the US
hotels and airports businesses and Hodder Headline Limited. As a result, WH
Smith now has two businesses: WH Smith Retail and News Distribution. Although
these businesses have operated within the WH Smith Group for a long time, there
are limited operational synergies and the Board believes that there is no
continuing strategic logic for them to remain part of the same group.
Accordingly, the Board believes that it is now appropriate to separate the two
distinct businesses into independently listed entities. This will allow both
businesses to benefit from greater management focus on their respective
strategies as independent businesses.
As a separate company, the News Distribution business will be more responsive to
publisher needs and be capable of investing further in its services to
publishers. Without the link to the WH Smith Retail business, the News
Distribution business will also be able to work more effectively with other
retailers who have previously viewed the News Distribution business as being
part of a competitor's group. Furthermore, the Board believes that the News
Distribution business will be better placed to maximise its technological
investments, win new business and develop new revenue streams.
The OFT is currently reviewing the system of exclusive territory contracts
awarded by the publishers/distributors to wholesalers, following changes to
competition law from which newspaper and magazine wholesalers were previously
exempt. The OFT issued a draft opinion for consultation on 19 May 2005.
Following wide-ranging responses in the consultation process and an internal
review requested by senior management of the OFT, the OFT announced on 13 March
2006 that it would issue a new draft opinion on the compatibility of newspaper
and magazine distribution agreements with UK competition laws. The new draft
opinion was issued on 31 May 2006 and provides a framework for self-assessment
by wholesalers and publishers.
The newspaper and magazine distribution industry is becoming increasingly
customer focused and, irrespective of the terms of the OFT's final opinion, this
trend is likely to continue. News Distribution remains focused on continuing to
deliver excellent customer service. News Distribution is the UK's leading
wholesaler of newspapers and magazines. It benefits from economies of scale and
has invested heavily in IT systems to enable it to provide high levels of
customer service both to publishers and retailers. Consequently, the Board
believes the business is well placed to adapt to any changes in the market and
it will be playing an active part in the upcoming consultation process with the
OFT.
As an independent listed UK retailer, the Board believes the WH Smith Retail
business will also benefit from greater focus, enabling the High Street Retail
business to continue the delivery of its recovery plan and the Travel Retail
business to continue with its growth path.
Summary And Effect Of The Proposals
The Proposals involve the Demerger of the WH Smith Retail business from the
existing WH Smith Group, creating two new holding companies, Smiths News PLC
(which will be the holding company of the News Distribution business) and New WH
Smith PLC (which will be the holding company of the WH Smith Retail business).
WH Smith Shareholders will receive one Smiths News Share and one New WH Smith
Share for each WH Smith Share. Shareholders will hold the same proportion of
shares in Smiths News and New WH Smith after the Demerger as they held in WH
Smith before the implementation of the Proposals. Upon the Demerger, New WH
Smith PLC will be renamed 'WH Smith PLC'.
The steps required to implement the Proposals include the insertion of a new
holding company, Smiths News, between WH Smith and its shareholders via a scheme
of arrangement, a reduction of share capital of Smiths News, the Demerger of the
WH Smith Retail business by a dividend in specie of WH Smith, the issue to
Smiths News's shareholders (the former WH Smith Shareholders) of shares in New
WH Smith and a subsequent reduction of capital of New WH Smith. The aggregate
costs of the Proposals are not expected to exceed £12m.
Shareholder approval is needed to implement the Proposals and is being sought at
two Shareholder meetings, a Court Meeting and an Extraordinary General Meeting
(EGM). Notices convening these meetings will be set out in the Shareholder
circular, which is to be posted on or around 7 July 2006. The Smiths News
Prospectus and New WH Smith Prospectus, which contain prescribed information
relating to Smiths News and New WH Smith respectively, will be published at
www.whsmithplc.co.uk on or around 7 July 2006.
Boards Of New WH Smith And Smiths News
The board of New WH Smith will remain unchanged from that of WH Smith and will
comprise the following members:
Robert Walker Non-executive Chairman
Kate Swann Group Chief Executive
Alan Stewart Group Finance Director
John Barton Non-executive Director, Senior Independent Director
Mike Ellis Non-executive Director
Luke Mayhew Non-executive Director
MT Rainey Non-executive Director
The board of Smiths News will, with effect from the Demerger, comprise the
following members:
Brendan Fitzmaurice Non-executive Chairman
Dennis Millard Non-executive Deputy Chairman, Senior Independent Director
Mark Cashmore Chief Executive
Alan Humphrey Finance Director
Anthony Cann Non-executive Director
WH Smith is seeking, as soon as is practicable, a further non-executive director
to join the board of Smiths News.
Dividend Policies
The directors of Smiths News and New WH Smith intend to recommend a dividend of
4.0p per share and 6.2p per share, respectively, at the time of their
preliminary results announcements in October 2006. The timetable for the
declarations and payments of these dividends is expected to be in line with WH
Smith's historic practice. The aggregate value of these Smiths News and New WH
Smith dividends will equal the final dividend, which the Board currently would
expect to recommend in respect of the financial year ending 31 August 2006 if
the Demerger does not proceed. Taken together with the interim dividend of WH
Smith of 5.1p declared on 12 April 2006, the aggregate of these intended
dividends and the interim dividend equates to 15.3p per share.
Thereafter, the boards of Smiths News and New WH Smith intend to adopt
progressive dividend policies. New WH Smith's dividend policy will aim to
deliver real growth, taking into account the long-term development of the
business. The New WH Smith directors intend to target a dividend that would,
over time, be broadly covered twice by earnings. Smiths News's dividend policy
will reflect the highly cash generative nature of the business and the proposed
Smiths News directors intend, over time, to target a dividend that would be
broadly covered twice by earnings.
Going forward it is intended that the Smiths News and New WH Smith interim
dividends will be paid in June and final dividends will be paid in February, in
the approximate proportions of one-third and two-thirds, respectively, of the
total annual dividend.
Capital Structure And Effective Tax Rate
As part of the Demerger, approximately £70m of new borrowings will be drawn down
by Smiths News under new facilities (outlined below), principally to fund the
£50m payment to be made following the Demerger to the WH Smith Pension Trust
(Pension Trust) by the News Distribution business and the WH Smith Retail
business. Smiths News has entered into an agreement that will provide a £50m
term loan facility and a £50m revolving credit facility. Additionally, New WH
Smith has entered into a £90m credit facility agreement that will be available
for working capital and general corporate purposes. These facilities essentially
replace WH Smith's existing credit facility agreement. No new equity capital is
being raised by either New WH Smith or Smiths News. In addition, the existing WH
Smith B and C shares and 5.125% loan stock will be repaid and redeemed,
respectively.
Since the 2005 financial year and following its withdrawal from international
activities through the disposal of a number of businesses, WH Smith has had an
effective tax rate below the UK standard tax rate. Following the Demerger, it is
expected that New WH Smith and Smiths News will continue to have an effective
tax rate below the UK standard tax rate over the medium term. The exact tax rate
achieved will depend on the underlying profitability of each business and the
closing off of outstanding tax assessments. Over time, the tax rate in New WH
Smith and Smiths News is expected to revert to the UK standard tax rate. In the
current financial year, an effective tax rate of approximately 20% is expected.
Pensions
WH Smith currently operates two pension schemes, the defined benefit scheme, WH
Smith Pension Trust, and the defined contribution scheme, WH Smith
Pensionbuilder. No members have been admitted to the Pension Trust since 1 April
1996.
On an IAS 19 basis, at 31 March 2006, the gross defined benefit pension deficit
was £104m (£73m net of deferred taxation) for the Pension Trust, up from £87m at
28 February 2006 due to market conditions and revised assumptions. On an ongoing
basis, the gross defined benefit pension deficit was £159m (£111m net of
deferred taxation) for the Pension Trust. The ongoing deficit is greater than
the IAS 19 deficit due to different assumptions and calculation methodologies.
As a result of the Demerger, it is intended to divide the Pension Trust into two
sections: one for the News Distribution business and one for the WH Smith Retail
business. This will involve segregating the assets and liabilities of the
Pension Trust, by way of a 'sectionalisation' to reflect the membership of the
two businesses. These proportions will be approximately 35:65 for the News
Distribution business and the WH Smith Retail business, respectively. Assets
apportioned to one section of the Pension Trust will not be able to be used for
the purposes of the other section. There will be no cross-subsidy or
cross-guarantee between the sections of the Pension Trust, so that an employer
in the News Distribution business section will not be responsible for the
liabilities of an employer in the WH Smith Retail business section and vice
versa. However, for administrative and investment purposes the Pension Trust
will operate generally on a unified basis except that the principal employer
will be replaced with a sponsor for each of the sections of the Pension Trust.
The Pensionbuilder scheme will also be divided into two sections.
As part of the ongoing programme for reducing the pension deficit, the WH Smith
Group will make a further one-off payment to the Pension Trust of £50m. In the
period from 31 August 2004 to 31 March 2006 WH Smith has reduced the net pension
deficit by £71m as calculated under UK GAAP (from £144m to £73m). The one-off
payment would have effectively reduced the IAS 19 pension deficit to £38m net of
related deferred tax as at 31 March 2006. Upon sectionalisation and after taking
account of the £50m one-off payment:
• The News Distribution business's net pension deficit as at 31 March 2006
would have been £14m and £27m on a IAS 19 basis and an ongoing basis,
respectively, net of related deferred tax; and
• The WH Smith Retail business's net pension deficit as at 31 March 2006
would have been £24m and £49m on an IAS 19 basis and an ongoing basis,
respectively, net of related deferred tax.
The combined WH Smith Retail business and News Distribution business have also
agreed with the Pension Trust Trustees to make ongoing pension deficit payments
of £15m in total each year, commencing 1 September 2006, over the next five
years to reduce the Pension Trust deficit. The £15m annual payment will be
divided between the News Distribution business and WH Smith Retail business in
the estimated proportions 35:65, amounting to approximately £5m and £10m,
respectively. The aggregate future annual pension deficit payments of the two
businesses will be less than the current agreed annual pension deficit payments
of WH Smith, reflecting the reduced pension deficit following the one-off
contribution.
WH Smith has applied for and been granted clearance by the Pensions Regulator in
respect of the above pension arrangements.
WH Smith Share Plans
The Remuneration Committee of the WH Smith Group Board has reviewed all WH Smith
Share Plans.
Under the L-TIP, which covers circa 20 executives, existing awards will be
replaced with awards of options over shares in the post-Demerger employing
company with the same intrinsic value. Other terms and conditions remain
unchanged.
Unapproved options will be replaced with options over the post-Demerger
employing company with the same intrinsic value. Other terms and conditions
remain unchanged.
Approved options and the Sharesave scheme options become exercisable just prior
to Demerger as HMRC will not allow for the approved options or Sharesave scheme
options to be adjusted appropriately.
Under the rules of the Management Investment Plan (MIP) consent is required by
75% of participants in the MIP as measured by value to amend the rules of the
scheme in order that the Demerger is not considered an event that would trigger
the right to exercise Matching Awards. The Company has received the
participants' consent to amend the rules of the scheme. Following the Demerger,
participation in the MIP will continue for existing participants in both New WH
Smith and Smiths News. For every current Investment Share, participants will
receive one share in WH Smith Retail and one share in Smiths News. Kate Swann
and Alan Stewart, as Executive Directors, will be required to continue to hold
both the New WH Smith Shares and Smiths News Shares they receive as a result of
their holding of Investment Shares in order for their Matching Awards to vest.
All other participants will be required either to continue to hold shares of
both companies or sell the shares of the company which does not employ them, in
which case they will be required to purchase the equivalent value of shares in
their post demerger employing company net of tax and dealing costs, by 30
November 2006. Matching Awards will be paid in both New WH Smith Shares and
Smiths News Shares, to the value earned under the MIP regardless of the decision
made under personal investment.
For the TSR performance condition, the market capitalisation at the end of the
performance period of the two new companies plus reinvested dividends paid over
the whole of the three-year period, will be added together to determine the
percentage of Matching Awards vesting. The performance targets will continue to
be measured relative to the General Retailers Sector of the FTSE All Share
Index.
Separate EPS targets will be set for each business. The allocation of the
original WH Smith EPS target between the two businesses is in proportion to the
contribution that each business was originally planned to contribute to WH Smith
EPS at the time that the MIP was established. The targets are not being adjusted
for the on-going PLC costs relating to the Demerger (including the Smiths News
Credit Facility) so that the underlying profits required to achieve the targets
are effectively being increased. Consequently, it is estimated that, based on an
assumed level of RPI for the performance period of 3% per annum, the threshold
EPS for New WH Smith will be 23.0p and the maximum EPS will be 29.0p. Similarly,
it is estimated that the threshold EPS for Smiths News will be 11.4p and maximum
EPS will be 14.5p. In aggregate these estimated targets equate to 34.3p for
threshold performance and 43.5p for maximum performance, equal to the current
targets with the same assumptions for inflation.
Pursuant to resolutions to be proposed at the EGM, the directors of Smiths News
and New WH Smith will be authorised to introduce the new L-TIP, executive share
option scheme and employee Sharesave scheme after the Demerger.
Indicative Timetable
2006
------
Posting of circular and publication of prospectuses 7 July
Extraordinary General Meeting 2 August
Scheme becomes effective and Smiths News becomes the ultimate holding 30 August
company of WH Smith
Smiths News Shares admitted to the Official List and trading in Smiths 30 August
News Shares commences on the London Stock Exchange
New WH Smith Shares admitted to the Official List and trading in New 1 September
WH Smith Shares commences on the London Stock Exchange
Investors should note that on 30 and 31 August 2006, it is expected that Smiths
News PLC will trade as the new holding company for the WH Smith Group and will
hold both the WH Smith Retail and the News Distribution businesses prior to the
Demerger becoming effective, which is expected on 31 August 2006.
Information On New WH Smith And Smiths News
Information on New WH Smith and Smiths News is set out in the annex to this
announcement.
ENDS
Enquiries:
WH Smith PLC
Mark Boyle Investor Relations +44 (0) 20 7851 8820
Louise Evans Media Relations +44 (0) 20 7851 8850
Greenhill Financial Adviser to WH Smith +44 (0) 20 7440 0400
James Lupton
Peter Bell
JPMorgan Cazenove Brokers to WH Smith +44 (0) 20 7588 2828
Edmund Byers
Luke Bordewich
Merrill Lynch Brokers to WH Smith +44 (0) 20 7628 1000
Mark Astaire
Patrick Bowes
Brunswick PR Advisers to WH Smith +44 (0) 20 7404 5959
Tom Buchanan
Kate Holgate
The contents of this announcement have been issued by and are the sole
responsibility of WH Smith PLC.
Greenhill & Co. International LLP, which is regulated in the UK by the Financial
Services Authority, is acting for WH Smith as financial adviser and sponsor for
Smiths News and New WH Smith as sponsor in connection with the Proposals and for
no one else and will not be responsible to any other person for providing the
protections afforded to its clients, or for providing advice in relation to the
Proposals.
This announcement does not comprise a prospectus relating to Smiths News or New
WH Smith. It does not constitute or form part of any offer of securities, or
constitute solicitation of any offer of securities. You should not purchase or
subscribe for securities referred to in this announcement except on the basis of
information in the prospectuses to be issued in due course in relation to Smiths
News and New WH Smith (and any supplement or amendment thereto).
This announcement does not constitute a recommendation concerning the Proposals,
and should not be construed as legal, business, tax or investment advice. The
value of shares can go down as well as up. Past performance is not a guide to
future performance. Shareholders of WH Smith should consult a professional
adviser as to the suitability of the Proposals for the individual concerned.
Shares in Smiths News and/or New WH Smith have not been and will not be
registered under the United States Securities Act of 1933 (as amended) and will
be issued in transactions that are exempt from or not subject to the
registration requirements of such Act. In addition, shares in Smiths News and/or
New WH Smith have not been and will not be registered under the securities laws
of any state of the United States, and will be issued in reliance on available
exemptions from such state law registration requirements.
This announcement contains certain forward-looking statements. Such
forward-looking statements involve risks and uncertainties that could
significantly affect expected results and are based on certain key assumptions.
Many factors could cause actual results to differ materially from those
projected or implied in any forward-looking statements. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date hereof. WH
Smith, Smiths News and New WH Smith disclaim any obligation to update any
forward-looking statements contained herein, except where it would be required
to do so under applicable law.
The financial information concerning WH Smith, Smiths News and New WH Smith
contained in this announcement does not amount to statutory accounts within the
meaning of section 240 of the Companies Act 1985.
Annex
Information On The WH Smith Retail Business
WH Smith Retail is one of the best-recognised UK retail brands and has an
extensive store portfolio spanning 543 high street and 128 travel stores. It is
present in 85 per cent. of the top 500 UK retailing locations and 95 per cent.
of its stores are in prime locations with high customer traffic. On average,
just over 1.2 million people visit a High Street Retail store every day and
approximately 125 million travellers pass WH Smith Retail's busiest travel store
at London's Victoria Station each year.
WH Smith Retail has market-leading positions in three product categories, with
market shares of approximately 15 per cent. in books, 18 per cent. in magazines
and 13 per cent. in stationery. It has a reputation as one of the UK's most
popular stationers, booksellers and newsagents. Its outlets are frequently a
first choice for customers on the high street and it is a trusted convenience
retailer for customers at its travel locations.
In the year to 31 August 2005, WH Smith Retail had operating profits before
exceptional items of £47m on revenues of £1,423m and gross assets of £542m.
Information On The Smiths News Business
1. Business overview
News is the UK's leading wholesaler of newspapers and magazines by share by
value, serving approximately 22,000 retailers in England and Wales daily. News
handles over 59 million copies of newspapers and magazines every week serving
retail outlets ranging from small newsagents and convenience stores to
supermarkets and garage forecourts. It receives newspapers and magazines in bulk
from publishers and distributors and then re-packs and distributes them to
retailers in one of the most time sensitive and fast-moving daily logistics
operations in any supply chain. As products are sold predominantly on a 'sale or
return' basis, News also handles the return of newspapers and magazines unsold
by retailers. News provides a number of other services to publishers/
distributors and retailers including copy management, information provision and
merchandising. News currently has an approximate 39 per cent. share by value of
the magazine wholesaling sector and an approximate 36 per cent, share by value
of the newspaper wholesaling sector in the UK.
News is positioned between publishers/distributors and retailers and provides
services to both:
•For publishers/distributors, News distributes their titles and manages
copy allocation to increase sales and availability and to reduce returns.
News also undertakes sales development activities and provides the
publishers/distributors with sales data and support to help them achieve
growth in sales; and
•For retailers, News supplies newspapers and magazines aiming to maximise
sales and availability and handles returns. News also offers a number of
services to help retailers increase sales and maximise business
opportunities, including: sales development activities, marketing support,
sales information, range and space advice, shop refitting and merchandising.
Publishers of newspapers and distributors of magazines normally enter into
long-term supply contracts (on average around five years) with the wholesalers.
These contracts currently provide for exclusivity in pre-determined geographic
territories. The geographic territories are broadly similar for the magazine and
newspaper sectors. The territories of publishers/distributors and wholesalers
have evolved to a level where the efficiency of distribution is high, with
publishers/distributors effectively sharing the cost with wholesalers to market
in a way that is difficult for any individual industry participant to match
economically.
Recent contract awards with publishers/distributors have progressed well and
News has now, in line with the current industry structure, contracted
approximately 81 per cent. of its revenue. The contracts have an average of four
years remaining on each contract.
News operates 45 warehouses throughout England and Wales. News has approximately
4,200 employees and uses around 1,400 contractors. The News business operates 24
hours a day, 364 days a year.
The News business generated operating profit of £33m on revenues of £1,187m in
the financial year ended 31 August 2005 on an unaudited pro forma basis. In the
current financial year to date, News continues to deliver a solid trading
performance through service improvements and tight cost control, recording sales
of £587m and generating operating profit of £17m for the 26 weeks ended 28
February 2006 on an unaudited pro forma basis, despite slower consumer spending
and rising costs.
2. Market overview
2.1. UK industry background
The UK newspaper and magazine industry is a developed and diverse market with
high numbers of newspapers and magazines produced per capita. Magazines and
newspapers are sold to consumers through approximately 53,700 retail outlets,
reaching all parts of the UK.
The national newspaper sector in the UK is dominated by five major publishing
groups. The retail sales value of national newspapers sold in the UK in 2005 was
estimated to be £2.27bn and has grown in value at a compound annual growth rate
of 2.6 per cent. since 2000.
The magazine sector is divided into weekly and monthly titles as well as
one-shots (one-off publications which cover particular events, for example the
football World Cup) and partworks (publications produced as a series to form a
collection). The number of consumer magazines published in the UK is currently
approximately 3,300 titles. Approximately 42 million consumer magazines are
delivered to retailers every week. The retail sales value of consumer magazines
sold in the UK in 2005 reached £2.03bn and has grown in value at a compound
annual growth rate of 3.1 per cent. since 2000.
The magazine and newspaper supply chain operates on a sale or return basis.
Publishers of newspapers and distributors of magazines generally award long-term
supply contracts (on average around five years) to wholesalers. These contracts
currently provide for exclusivity in pre-determined geographic territories with
the relevant wholesaler being appointed as the exclusive supplier of that
newspaper publisher or magazine distributor's titles in the territory and being
granted with absolute territorial protection (see below). The geographic
territories for the magazine and newspaper sectors are broadly similar. The
territories of publishers/distributors and wholesalers have evolved to a level
where the efficiency of distribution is high, with publishers/distributors
effectively sharing with wholesalers the cost to market in a way that is
difficult for any individual industry participant to match economically.
2.1.1. Overview of absolute territorial protection
In a newspaper or magazine distribution agreement, News is usually awarded an
exclusive territory in which to distribute the particular publisher's/
distributor's titles to retailers. The agreement usually grants News absolute
territorial protection as a result of a ban on both active and passive sales. A
ban on active sales means that News is prevented from actively marketing its
titles to retailers located outside of its exclusive territory (i.e. into
another wholesaler's exclusive territory). A ban on passive sales mean that News
is also prevented from responding to a request for supplies from retailers
located outside of its exclusive territory, even if that request is unsolicited,
and vice versa for other wholesalers in News's territory. The majority of
newspaper and magazine distribution agreements appoint wholesalers on this
basis. The Code of Practice also contains a restriction on passive sales as it
requires that a wholesaler does not accept an application for the supply of
newspapers from an applicant located outside its operation as defined by the
relevant newspaper publisher.
In the absence of absolute territorial protection, News would still have the
exclusive right to market the publisher's/distributor's titles actively to
retailers in a particular territory. It would continue to be prevented from
actively selling to retailers located outside of its exclusive territory.
However, News would be able to respond to a 'passive' (unsolicited) request for
supplies from a retailer located outside of its exclusive territory (i.e. in a
competing wholesaler's territory) and supply that retailer from its own
exclusive territory. Likewise, other wholesalers would be able to supply
retailers located in News's exclusive territory in response to an unsolicited
request for supplies, from their exclusive territories.
2.2. Newspaper publishing
The tables below set out the estimated current shares by value of each of the
publishers, wholesalers and retailers in the supply of national newspapers.
2.2.1. National newspaper sector share
Publisher Wholesaler Retailer
News International 31% Smiths News 36% Independent 62%
Associated News 22% Menzies Distribution 28% Newsagents
Mirror Group 16% Dawson News 22% Tesco 6%
Telegraph 10% Independents 14% TM Retail 5%
Express 9% WH Smith Retail 3%
Guardian 5% Sainsbury 3%
Independents 3% Morrison 2%
Financial Times 2% T&S 1%
Sport 1% Star News 1%
Other 1% ASDA 1%
Other 16%
Source: News data, based on contract awards and net sales
The five principal newspaper publishers currently account for 88 per cent. of
the market. The retail channel is more fragmented with small independent
newsagents still accounting for the majority of retailer outlets.
News's geographic areas cover some of the more populated areas of the UK,
compared to its competitors.
2.2.2. Industry trends and key drivers
The national daily UK newspaper sector has experienced declining circulation
volumes since the late 1980s due to changing consumer lifestyles and the
increased availability of news through television and the internet. Newspaper
publishers have increased cover prices with the average newspaper cover price
increasing by an average 4.3 per cent. per annum since 2000. This has driven
circulation revenue growth of 2.6 per cent. per annum over the same period as
the cover price increases offset circulation declines. The growth in circulation
revenue is an important trend for wholesalers as they are generally remunerated
on the basis of cover prices (70 per cent. of News's newspaper revenues derive
from contracts based on the value of sales, and 30 per cent. based on volume of
sales).
2.3. Magazine publishing
2.3.1. Structure and size
The UK magazine sector has different characteristics from the newspaper sector,
as there is a broader range of titles. The magazine publishing market is more
fragmented than the newspaper publishing market with a large number of small
publishers. Many publishers lack the scale to arrange their own distribution,
necessitating an intermediary in the magazine value chain, the distributors,
which in most cases are owned by the larger magazine publishers.
The tables below set out the estimated current shares by value of each of the
publishers, distributors, wholesalers and retailers in the supply of magazines.
2.3.2. Magazine sector shares
Publisher Distributor Wholesaler Retailer
IPC Media 18% Frontline 29% Smiths News 39% WH Smith 18%
Retail
Emap 13% Marketforce 27% Menzies 34% Tesco 13%
Distribution
Bauer 7% Comag 21% Dawson News 24% Sainsbury 6%
BBC 6% Seymour 7% Independent TM Retail 4%
Future 5% Northern & wholesalers 3% Morrisons 4%
Northern & Shell 4% ASDA 4%
Shell 3% Magazine Somerfield 2%
Marketing
Haymarket 2% Company (MMC) 2% One Stop 1%
National Associated News 2% Independent
Magazine 2% Other 9% newsagents 34%
Trader 2% Other 14%
Media
Dennis 2%
Hello 2%
Puzzler 2%
Media
DC Thomson 2%
Conde Nast 1%
Other 33%
Source: News data, based on contract awards and net sales.
The UK magazine industry currently comprises over 3,300 consumer titles with an
estimated retail sales value of £2.03bn. As with newspapers, the magazine
industry has two core revenue streams: circulation (retail sales) and
advertising.
2.3.3. Industry Trends and Key Drivers
In the early 2000s the magazine sector was characterised by the emergence of
weekly magazine titles, which took market share from monthly magazines. Since
2000, UK magazine circulation has grown at a 0.9 per cent. compound annual
growth rate to 1.37 billion copies. This has been driven by 2.3 per cent. annual
growth in weeklies over the period while monthlies circulation has declined by
1.1 per cent. as the traditional weekly TV listings and popular women's titles
have been complemented by more high profile weekly magazines focusing on
celebrities, popular leisure and fashion interests. Cover prices have grown at a
compound annual growth rate of 2.3 per cent. since 2000 with weeklies up 3.2 per
cent. and monthlies up 2.7 per cent. annually.
3. Competitive strengths
The News business is well placed to deliver strong profit growth and cash
generation through:
- UK's leading wholesaler
News is the UK's leading newspaper and magazine wholesaler in the sector with an
approximate 39 per cent. share by value of the magazine wholesaling sector and
an approximate 36 per cent, share by value of the newspaper wholesaling sector
in the UK.
Newspaper and magazine wholesaling is an industry that favours scale and high
local market share. There are high fixed costs associated with packing and
delivery, therefore, within any given locality, the wholesaler with the most
contracts awarded by publishers/distributors will have the lowest unit operating
cost. As the UK's largest industry participant in the newspaper and magazine
wholesaling distribution industry, News benefits from economies of scale.
- Long-term contracts with predictable revenues and gross margins
The long-term contracts that News has been awarded by the major newspaper
publishers and magazine distributors give some certainty over future revenues
and gross margins. Following recent contract awards, News has now, in line with
the current industry structure, contracted approximately 81 per cent. of its
revenues. The contracts have an average of approximately four years remaining on
each contract. News's profits are relatively predictable due to certainty of
distribution contracts, stable cost structure and the inflation indexation in
its carriage service charges to retailers.
- Highly cash generative
The combination of strong operating cash flow and low capital expenditure
requirements make the News business highly cash generative.
- Organisational adaptability and innovation
News's organisational adaptability makes it readily able to react to changing
needs in the marketplace. News uses its technology to provide innovative
tailored services to individual retailers. An example of this is News's
sales-based replenishment system, which reduces the stock levels that need to be
held by retailers.
- Technological investment
News currently operates market leading SAP technology, enabling it to provide
better customer service and more efficient business operations than its
competitors. The News business has spent £5m on sophisticated picking and
sorting equipment and £22m to date on implementing SAP technology to improve its
efficiency at handling both physical product and information flows. This
technology is regularly improved to ensure that the News business is at the
forefront of industry technology.
- High level of customer service
With the latest technology, News believes that it provides both publishers/
distributors and retailers with superior customer service through the provision
of rapid, detailed information on sales, returns and circulation. Independently
conducted surveys consistently benchmark News as a market leader for customer
service in the industry. The increasing technological sophistication of these
services ensures that News's relationships with publishers/distributors and
retailers are strengthened, thereby enhancing News's competitive position.
Management's strategy is to invest further in services that improve the
profitability of newspapers and magazines for key retailers, thereby building
the commercial relationship between the major retailers and News, as it becomes
further involved in retailers' processes and work practices.
- Extensive distribution network
The distribution network of the News business covers the more highly populated
regions of the UK, providing a highly time-sensitive logistics service for its
suppliers and creating opportunities for share and product range expansion.
- Opportunities to develop new revenue streams
News is planning to capitalise on revenue growth opportunities such as expanding
merchandising and promotional services to publishers/distributors, providing
revenue-generating on-line information services to distributors, publishers and
retailers, and using its warehouse and delivery fleet infrastructure to handle
other products for retailers and other customers. News has recently established
a new business called 'The Returns Company' with a view to entering the returns
logistics market. The separation of News and WH Smith Retail is expected to
enhance News's ability to develop this new business. News also plans to use its
existing technology investments to offer IT consultancy through a new operation
called 'Newsworks.'
- Proven track record of reducing costs
Since 2001, News has been successful at reducing operating costs by over £10m.
The advanced technology systems of the News business have made a large
contribution towards these improvements and the framework that is now in place
allows for continued cost reduction.
- Experienced senior management team
The management team at News has over 57 years of combined experience in the
industry and has successfully tendered for publisher/distributor contracts and
reduced costs since 2001. Management has developed a strategy to ensure that
News is best placed in the current market environment, having reduced the number
of warehouses it operates from and increased the efficiency of the business over
the last five years. Management has also led industry initiatives seeking to
improve the industry supply chain through the introduction of Tote and Track,
key performance indicators (KPIs), magazine scan, returns processing and Sales
Based Replenishment.
4. Strategy
As a consequence of the changes in the newspaper and magazine wholesale industry
in the late 1980s, News's strategy in the early 1990s focused on developing its
position within the industry structure of exclusive publisher area contracts.
News rationalised its network to improve effectiveness and reduce infrastructure
costs. The primary focus of the News business at this time was to meet the needs
of publishers through the retail network.
Since 2000, News has focused on investing in the quality of its service to
publishers/distributors and retailers in order to gain market share in a
competitive environment and to use the improved data management capability of
its SAP technology. At the same time News embarked on a significant cost
reduction programme to improve profitability. These initiatives were facilitated
by the automation introduced through the SAP system (£22m investment to date)
and the TWI pick and pack system technology, which have enabled a reduction in
waste and improved process effectiveness.
The News business has a track record of investment in market leading
innovations, which enable it to provide a high quality service to both
publishers/distributors and retailers while enhancing the profitability of News
by refining the business's cost structure, as well as generating new revenue
initiatives.
During 2005, transparent key performance indicators (KPIs) were introduced by
News and disclosed to publishers/distributors and retailers. These allow
visibility of News's logistics performance for publishers/distributors and
retailers. The KPIs are agreed in conjunction with publishers, distributors and
retailers and have generated a step change in service performance. Performance
is now measured across core logistics areas such as timely delivery, accuracy of
supplies and returns and product tracking to and from stores. The provision of
this information is only possible due to the substantial systems investment
undertaken by the News business. Performance improvement has been delivered
through the introduction of new measurement tools, a dedicated support team plus
clear accountability and responsibilities amongst the staff. The benefits of
introducing this service are cost savings and reduced wastage, as well as
building better customer relations across the supply chain.
The market leading, enterprise-wide technology investment made by News gives it
a competitive advantage and provides opportunities for new revenue streams such
as additional information services and returns logistics. News is developing
services to generate improved profits for retailers and publishers/distributors
and to build relationships. These include:
•Sales Based Replenishment (SBR): a form of 'just in time' delivery for
retailers that helps them to improve availability and reduce waste by
replenishing stock more frequently based on the retailers' sales data. SBR
is currently available in all but two of the magazine warehouses of News
across the top 300 magazine titles; and
•Vendor Managed Inventory (VMI): management of stock and other retailer
processes. This is under trial at the moment; and
•Electronic Data Interchange (EDI): paperless management of the supply
chain, reducing waste for all parties. News is currently in discussion with
several industry participants about EDI
These services help to increase the attractiveness of News's offering and
enhance its relationship with the retailers.
News has established a new business called 'The Returns Company' to focus on the
returns logistics sector. This is a relatively new sector to the UK, but is set
to expand as retailers seek to outsource the processing of returns to specialist
third parties. News has the skills and infrastructure to make rapid progress
into this sector. 'The Returns Company's' current focus is on books, though the
service could be used by many types of retailers that need to manage returns.
The separation of News and WH Smith Retail is expected to allow News to develop
this product with other retailers more rapidly.
News has also developed an IT consultancy service named 'Newsworks' to provide
systems solutions to publishers, distributors and European wholesalers by
adapting News' information systems. News is able to use its existing technology
know-how to provide systems solutions in the newspaper and magazine industry.
The new revenue opportunities from 'The Returns Company' and 'Newsworks' are
expected to contribute less than 10% of profits over the medium term. There are
also opportunities to increase market share in its national newspaper and
magazine business, as well as seeking to increase its current limited presence
in the regional newspaper distribution market.
5. Operations
News has three sources of revenues:
•Publisher/distributor revenues
Magazines revenues are calculated as a percentage of the cover price of the
products sold, based on volume net of returns. Approximately 70 per cent. of
News's newspaper revenues are based on a percentage of the cover price, with the
remainder based on fixed price per copy contracts (generally indexed to
inflation), regardless of cover price.
•Carriage service charges (CSC)
These charges are paid to News by the retailer. News has a standard template of
CSC bands, which specify the charges payable by the retailer. This template is
applied on a national basis and is reviewed annually by the News business. The
template ensures that the charges are indexed for inflation in labour and fuel
costs.
•Other activities revenues
Paid to News by publishers/distributors and retailers for the additional
products and services it provides, such as: vouchers, handling of supplements,
information provision, merchandising and returns management.
In the 2005 financial year News generated approximately 52% of revenue from
newspapers, 44% from magazines and 4% from carriage service charges and other
activities.
6. Capital Expenditure
Capital expenditure was approximately £6.3m for the 2005 financial year and
consisted primarily of ongoing maintenance expenditures. The News business does
not require significant capital expenditure to maintain its warehouses and the
cost is usually below the depreciation charge in the annual accounts. Ongoing
expenditure is expected to focus primarily on maintaining and refurbishing the
existing IT systems. The Returns Company and 'Newsworks' may require limited
additional future investment.
7. Pro forma financial information
7.1. Income statement
Year ending 31 6 months ended
August 28 February
2005 2006
IFRS IFRS
£million
Continuing operations
Revenue 1,187 587
----------- -----------
Operating profit 33 17
Finance costs (4) (2)
----------- -----------
Profit/(loss) before tax 29 15
----------- -----------
7.2. Balance sheet
-----------
As at 28
February 2006
IFRS
-----------
£ million
Non-current assets 34
-----------
Net current liabilities (55)
-----------
Of which: Cash and cash equivalent ---
: Obligations under finance leases (1)
: Bank overdrafts and other borrowings (16)
-----------
Non-current liabilities
Bank loans and other borrowings (50)
Retirement benefit obligation (14)
Deferred tax liabilities (4)
Long-term provisions (1)
Obligations under finance leases (2)
Other non-current liabilities ---
-----------
-----------
-----------
Total net liabilities (92)
-----------
-----------
8. Executive Directors And Senior Management
Details of the Executive Directors and Senior Managers of New WH Smith are set
out below:
Kate Swann (41), Group Chief Executive
Alan Stewart (46), Group Finance Director
Stephen Clarke (38), Commercial and Marketing Director
Tanith Dodge (45), Group Human Resources Director
Simon Marinker (47), Stores Director and Managing Director of Travel Retail
Neil Monnery (44), Group Strategy Director
Robert Moorhead (41), Finance, Property, IT and Direct Director
Details of the proposed Executive Directors and Senior Managers of Smiths News
are set out below:
Mark Cashmore (45), Chief Executive Officer
Alan Humphrey (52), Finance Director
Jonathan Bunting (34), Commercial Director
Graeme Underhill (46), Operations Director
Glenn Leech (31) Human Resources Director
Richard Webb (41), Information Systems Director
Mark Charlton (44), Business Planning Director
9. Definitions
Code of Practice The industry code of practice for the supply of newspapers
to retailers
Demerger The proposed demerger of the WH Smith Retail business to
create the WH Smith Retail Group and the Smiths News Group
Demerger Effective The date on which the Demerger becomes effective, expected
Date to be 31 August 2006
EPS Earnings per share
High Street Retail The part of the WH Smith Retail business which operates from
primarily high street locations, rather than travel
locations, comprising the sale of a wide range of
newspapers, magazines, stationery, books and entertainment
products
New WH Smith New WH Smith PLC (to be renamed WH Smith PLC)
New WH Smith Share The ordinary shares in New WH Smith to be allotted and
issued pursuant to the Demerger
News Distribution The business carried on by the WH Smith Group prior to the
business or the Demerger, of wholesaling and distributing newspapers and
News business or magazines to retailers and supplying other services to
News publishers and retailers
OFT The Office of Fair Trading
Proposals Collectively the proposed Scheme and Demerger and the
subsequent New WH Smith Reduction of Capital
Scheme The proposed scheme of arrangement
Shareholder A registered holder of WH Smith Shares including any person
entitled by transmission
Smiths News Smiths News PLC
Smiths News Credit The £50m revolving credit facility and £50m term loan
Facility entered into by Smiths News
Smiths News Group Smiths News and those entities which will be its
subsidiaries and subsidiary undertakings as from the
Demerger Effective Date and where the context requires, its
associated undertakings, which will own and operate the News
Distribution business following the Demerger
Smiths News Share The ordinary shares in Smiths News to be allotted and issued
pursuant to the Scheme
Travel Retail The part of the WH Smith Retail business comprising the sale
of a tailored range of newspapers, magazines, books and
confectionery products from outlets primarily based in
airports and railway stations
WH Smith WH Smith PLC
WH Smith Board or The directors of WH Smith as at the date of this
the Board announcement
WH Smith Group Before the Demerger, WH Smith and its subsidiaries and
subsidiary undertakings and, where the context requires, its
associated undertakings
WH Smith Retail The business carried on by WH Smith Group prior to the
Demerger of retailing through High Street Retail and Travel
Retail
WH Smith Retail The entities which carry on the WH Smith Retail business
Group
WH Smith Share The ordinary shares of 2 13/81p each in the capital of WH
Smith
WH Smith Holders of WH Smith Shares
Shareholders
This information is provided by RNS
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